Crypto Academy Season 5 Beginners Course- Task 6: Different Types of Consensus Mechanisms

designed by @merci26 using desygner

---

(1) What is the difference between PoW & PoS? Advantages & Disadvantages? Which one is better in scaling Capacity? Examples?

---

Line source

PROOF OF WORK

Also known as PoW is a consensus mechanism used by cryptocurrency(Bitcoin) to verify new and old transactions, put them on the Blockchain as well as add tokens. The consensus mechanism is a system that allows crypto computers to agree on a legitimate network. It's called proof of work because huge amount of electricity(power) is required by the network. Both proof of work and mining are closely related. Proof of Work (PoW) is more of a protocol designed to secure digital transactions without having to rely on a third party. This is done by correlation of previous puzzle solutions. When puzzles are solved, rewards are generated which are known as it's mining. This puzzles are in the form of algorithm that are designed to verify transactions and obtain new blocks added to Blockchain.

With Proof of Work, miners are in fierce competition to finish complex mathematical puzzles which will generate this new block, and when successful, they collect new Bitcoins as rewards. The verification of Proof-of-work blockchains are done by virtual miners. The winner of each puzzle is assigned to update the Blockchain with the latest verified transaction. The proof of work Blockchain is very secure as it operates on cryptography, at the same time it's very hard to do work so it reduces the risk of an attack. The proof of work has a system known as Hashcash system which makes it difficult for any miner to be able to control bitcoin network single handedly.

For a miner to propose a new block, they need to proof that they have done some work. Although, each solution is easy for community to verify providing room for trustworthiness. In PoW, the number of blocks that each miner can generate is 1bitcoin block for every 10minutes. Bitcoin was the pioneer of PoW with the SHA256 function in use. Ethereum 1.0 also uses PoW. The PoW system had the limitations of scalability and high power consumption rate. This led to the formation of another consensus mechanism known as Proof of stake.

---

PROOF OF STAKE

Also known as PoS is one of the two major consensus mechanisms used to verify new transactions, add new tokens and put them on the Blockchain. In PoS, instead of miners solving cryptographic puzzles, the mining power depends on the number of coins they hold. In others words, the higher your number of coins owned the higher your mining power and the lower the number of coins you own, the lower your mining powers.

In PoS, what the validator receives is network fees as reward.
The first cryptocurrency to implement a full-scale PoS consensus model was the Peercoin.

PoS was created to address the issue of scalability and environmental sustainability concerns which was a limitation with PoW. With PoS, some protocols like, smart contracts, non fungible tokens (NFT), decentralised finance(DeFi) which are now common can be used.

Although the Ethereum 1 Blockchain used the PoW, but an entirely new Ethereum 2 Blockchain is been built starting from December 2020 which uses PoS. In a PoS system, staking is synonymous and serves similar function to mining in proof of work.

In the PoS system, a network of “validators”, stake their own cryptocurrency in other to get a chance to validate new transactions, update the Blockchain, and earn a reward, although this depends on the project. The winner selected depends on the amount of crypto each validator has in the pool and the time duration they’ve had it there.

Once the latest block of transaction has been validated by the winner, other validators can affirm that the block is accurate. When a threshold number of attestations have been made, the network will update the Blockchain. Then all who participated as validators will receive the native cryptocurrency in proportion to their stake.

Becoming a validator comes with financial responsibility and high level of technical knowledge. To become a validator, you're required to stake a minimum amount of 32ETH for ETH 2.0 some of which could be lost through slashing if their node goes offline or if a “bad” block of transactions is validated.

Some of the cryptocurrencies that uses PoS includes Tezos(XTZ), Cosmos(ATOM), Cardano(ADA) etc

---

The differences between proof of work and proof of stake includes;

PoW	PoS
Proof of work uses the acronym PoW	while proof of stake uses the acronym PoS.
PoW involves mining	while PoS involves Staking.
In PoW the person(s) carrying out the work are called Miners	while in PoS persons staking are called Validators
In PoW, a reward is given to the first miner who solves a cryptographic puzzle of each block	while in PoS the validator receives network fees as reward.
PoW are less energy efficient	while PoS are more energy efficient.
PoW requires less capital	while PoS requires more capital
PoW require specialized equipment for optimum processing power	while PoS require just standard serves.
PoW has limitations of scalability, DeFi products, smart contracts etc	while PoS was created to address this limitations.

ADVANTAGES OF POW

DISADVANTAGES OF PoW

1. It requires high amount of power.

2. It has negative environmental impacts.

3. The transaction speeds are slow with high gas fees.

4. The minings are tedious with advanced hardwares.

5. There's the problem of scalability.

6. As newly minted cryptocurrencies near their cap it results to long-term disincentives to mining.

ADVANTAGES OF PoS

1. They are very energy efficient as they don't require the problems of computational powers.

2. They offer better rewards for stackers.

3. They provide fast transactions with low gas fees.

4. Validators don't require special equipment to stake their cryptocurrency.

5. There's no problem of scalability.

6. They offer less negative environmental impacts.

DISADVANTAGES OF PoS

1.They have models which generally results in a less decentralised network.

1. Proof of stake models are less secure and can be susceptible to low-cost attacks.

2. Validators with large holdings can have excessive influence on transaction verification as they receive most of the rewards.

3. It hasn't proved to be sustainable in the long run.

4. The system doesn't provide for equity as it only makes the rich to get richer.

5. It's system is harder to implement.

SCABILITY

Examples of cryptocurrencies that use PoS include;

• EOS (EOS)
• Tezos (XTZ)
• Ethereum (ETH 2.0)
• Binance (BNB)
• Cardano (ADA)
• Akash Network (AKT token)
• Cosmos (ATOM)
• Raydium (RAY)
• Lisk (LSK)
• Decentral Games ($DG)
• Private Instant Verified Transaction (PIVX)

CONCLUSION

@dilchamo